Tilburg University

From the SelectedWorks of Michael Diathesopoulos

Fall September 1, 2011

Ownership Unbundling in European EnergyMarket & Legal Problems under EU LawMichael Diathesopoulos, University of Cambridge

Available at: https://works.bepress.com/michael_diathesopoulos/2/

1

OWNERSHIP UNBUNDLING IN EU & LEGAL PROBLEMS

I. INTRODUCTION

II. COMPETENCE ISSUES

1. Art 114 TFEU

2. Competence Issues after Lisbon Treaty

3. Principle of Subsidiarity

4. Conclusions

II. FREEDOM OF MOVEMENT OF CAPITAL & FREEDOM OF

ESTABLISHMENT

1. Content of the Freedoms and Relation between them

2. Acceptable Restrictions to the Freedoms

3. Principle of Non-Discrimination

III. ART. 345 TFEU

1. Content of the Provision

2. Ownership Unbundling and Publicly Held Undertakings in relation to 345 TFEU

3. Conclusions

IV. FUNDAMENTAL RIGHTS AND ESPECIALLY THE RIGHT TO

PROPERTY

1. Legal Basis for the Protection of the Right to Property in EU

2. Possible Violations of Fundamental Rights

3. Conditions for Justified Limitations or Deprivations of Property

4. Other Freedoms & Rights

V. PROPORTIONALITY PRINCIPLE

1. Content of the Principle

2. Ownership Unbundling and Proportionality

3. Conclusions

VI. FINAL CONCLUSIONS

2

INTRODUCTION

In this paper we will examine the issue of ownership unbundling and forced

divestiture remedies imposed in a series of recent competition law cases of the energy

market –examined above- in relation to the possible existence of a series of legal

obstacles.

These energy market decisions belong to a group of antitrust cases in which a

structural divestiture remedy has been imposed under the provisions of Article 9 of

Regulation 1/2003. This divestiture refers to transmission networks1 and to generation

capacity2 and is meant to lead to severe structural changes, which are compatible with

the findings of 2007 Sector Inquiry and its Proposals for the Third Energy Package

and are assumed to accelerate the progress of the establishment of the internal energy

market. By favouring such remedies in these cases, Commission affirmed its position

as the latter was expressed in relation to the Third Energy Package. Commission

suggested ownership unbundling as the most important remedy, in order to resolve

problems in the energy sector, related to vertically integrated big firms. Commission

proposed full ownership unbundling,3 meaning the complete separation of ownership

of generation assets from ownership of transmission assets and the separation of all

network functions from the other activities of the energy supply undertaking,4 as the

best possible solution, which would also lead to the dissolution of big “national

champions”.5 Therefore, ownership unbundling and divestiture of assets as an

antitrust remedy share a common basis, meaning that they lead to the transfer of

corporate assets to a third party. For this reason, we will examine the issue of the

legality of these remedies, in the same way as we would examine the legal

enforceability of ownership unbundling.6

1 Look to RWE Case (Case 39.402), ENI Case (Case 39.315), GDF foreclosure (Case 39.316) and

German electricity balancing market (Case 39.389). 2 Look to German electricity wholesale market (Case 30.388).

3 E. Cabau, ‘Unbundling of Transmission System Operators’ in C. Jones (eds.) The Internal Energy

Market: The Third Liberalisation Package, 90-94. 4 Third Energy Package also provides for unbundling of distribution system operators, however neither

Commission proposed nor Third Energy Package adopted ownership unbundling as an unbundling

form for distribution (unbundling of distribution is limited and refers to management, accounting and

legal unbundling). Look to C. Jones (revised and updated by E. Cabau), ‘Unbundling of Distribution

System Operators’ in C. Jones (eds.) The Internal Energy Market: The Third Liberalisation Package,

183 o.w; Art. 26 Dir. 2009/72/EC and Art. 26 Dir. 2009/73/EC. 5 Electricity Directive 2009/72/EC art. 9; Gas Directive 2009/73/EC

art. 9.

6 J. Pielow, G. Brunekreeft and E. Ehlers, ‘Legal and economic aspects of ownership unbundling in the

EU’, (2009) 2 Journal of World Energy Law & Business, 96, 109.

3

However, we should note that there are two major differences between the two cases.

First, regarding the antitrust decisions, this transfer was imposed as a result of the

application of general competition rules in specific cases where Commission assumed

that the undertakings were involved in anticompetitive behaviour and applied its

powers deriving directly from the EC Treaty, in order to restore competition; on the

other hand in the Third Energy Package, unbundling constitutes a measure of the

sector specific regulation, intended for a general and not prespecified group of

undertakings. Second, in the Third Energy Package, ownership unbundling is

established as the basic and default solution for transmission, however a number of

alternatives exist; on the other hand, in the antitrust cases, divestiture was imposed as

an obligatory remedy. These differences will be taken into consideration in our further

analysis.

Literature suggests that there may be a series of legal objections against ownership

unbundling: a) art. 345 TFEU7 (former art. 295 EC), b) the issue of EU’s

competences,8 c) the issue of ownership and other fundamental rights under the

ECHR an EU Law9 and d) the issue of compatibility with the freedom of capital

movement and the freedom of establishment.10

7 Look to J. Pielow, G. Brunekreeft and E. Ehlers, ‘Legal and economic aspects of ownership

unbundling in the EU’, 111; J. Pielow and E. Ehlers, ‘Ownership unbundling and constitutional

conflict: a typical German debate?’, (2008) 2 European Review of Energy Markets, 1, 13; M. Hunt,

‘Ownership Unbundling: the Main Legal Issues in a Controversial Debate’ in B. Delvaux, M. Hunt, K.

Talus (eds.) EU Energy Law and Policy Issues (Brussels, 2008), 71; P. Lowe, I. Pucinskaite, W.

Webster and P. Lindberg, ‘Effective unbundling of energy transmission networks: lessons from the

Energy Sector Inquiry’, (2007) 1 Competition Policy Newsletter, Spring 2007, 33 available at

http://ec.europa.eu/comm/competition/publications/cpn/cpn2007_1.pdf. 8 Look to J. Pielow, G. Brunekreeft and E. Ehlers, ‘Legal and economic aspects of ownership

unbundling in the EU’, 102; J. Pielow and E. Ehlers, ‘Ownership unbundling and constitutional

conflict: a typical German debate?’, 9; M. Hunt, ‘Ownership Unbundling: the Main Legal Issues in a

Controversial Debate’, 70. 9 Look to J. Pielow, G. Brunekreeft and E. Ehlers, ‘Legal and economic aspects of ownership

unbundling in the EU’, 109; J. Pielow and E. Ehlers, ‘Ownership unbundling and constitutional

conflict: a typical German debate?’, 18; M. Hunt, ‘Ownership Unbundling: the Main Legal Issues in a

Controversial Debate’, 73; P. Lowe, I. Pucinskaite, W. Webster and P. Lindberg, ‘Effective unbundling

of energy transmission networks: lessons from the Energy Sector Inquiry’, 33. 10 Look to M. Hunt, ‘Ownership Unbundling: the Main Legal Issues in a Controversial Debate’, 73.

4

COMPETENCE ISSUES

Art 114 TFEU

One of the first issues that literature points out as a possible problem for ownership

unbundling concerns the competence of EU to adopt such a radical structural measure

integrated into an analytical framework for the liberalisation of the European Energy

Market.11

According to art. 114 TFEU (former art. 95 TEC), EU has the competence

to impose measures aiming at the harmonisation of national laws, in order to improve

the process of the establishment and function of the internal market.12

This

competence of EU according to this article is limited, as the measures should intend to

resolve problems and obstacles to trade and free competition13

created by national

policies and laws. Therefore, there are three conditions, in order that art. 114 TFEU

provides competence for EU independent action. First, there must be or should be

highly probable14

to occur some obstacles to the internal market.15

Second, these

obstacles have to derive from specific national measures or policies.16

Third, the EU

measure has to be designed in order to efficiently remove the obstacles mentioned

above –there must be a relation between EU measure and obstacle-.17

Therefore, EU

measures regarding internal market –including energy market- should be imposed

after considering the existence of specific parameters. On these grounds, there could

be a debate regarding whether the situation in energy market could justify an EU

11

B. Delvaux and A. Guimaraes-Purokoski, ‘Vertical Division of Competences in the Energy Field

between the European Community and its Member States - Some Remarks on the Evolution of

European Energy Law and Policy’ in B. Delvaux, M. Hunt and K. Talus (eds.) EU Energy Law and

policy issues, The Energy Law Research Forum Collection (Brussels: Euroconfidentiel, 2008), 13-16. 12

Art 114 TFEU: “…adopt the measures for the approximation of the provisions laid down by law,

regulation or administrative action in Member States which have as their object the establishment and

functioning of the internal market.”; ECJ, Case C-376/98, Federal Republic of Germany v European

Parliament and Council of the European Union, ECR 2000, I-08419, at 83: “Those provisions, read

together, make it clear that the measures referred to in Article 100a(1) of the Treaty are intended to

improve the conditions for the establishment and functioning of the internal market. To construe that

article as meaning that it vests in the Community legislature a general power to regulate the internal

market would not only be contrary to the express wording of the provisions cited above but would also

be incompatible with the principle embodied in Article 3b of the EC Treaty (now Article 5 EC) that the

powers of the Community are limited to those specifically conferred on it.” 13

M. Hunt, ‘Ownership Unbundling: the Main Legal Issues in a Controversial Debate’, 71. 14

‘sufficiently probable’, J. Pielow and E. Ehlers, ‘Ownership unbundling and constitutional conflict: a

typical German debate?’, 10. 15 ECJ, Case C-376/98, Federal Republic of Germany v European Parliament and Council of the

European Union, at 84. 16

J. Pielow and E. Ehlers, ‘Ownership unbundling and constitutional conflict: a typical German

debate?’, 9-10. 17 ECJ, Case C-436-03, European Parliament v Council [2006] ECR I-03733, at 39.

5

intervention, based on the harmonisation competence of 114 TFEU and whether

energy policy falls within the spectrum of competences that should be in principal left

at the discretion of Member States.

Competence Issues after Lisbon Treaty

However, after Lisbon Treaty,18

energy is explicitly included in the list of shared

competences between EU and Member States19

and energy policy is named as one

key area of EU interest, while internal energy market is clearly assumed as one key

EU objective.20

By listing energy policy as a shared competence, TFEU’s meaning is

that both EU authorities and Member States –independently- have the competence to

impose measures and legislate –at a European, regional or national level-. Actually,

EU has the competence to set the minimum regulation standards in the relevant fields

–in the energy case guided by the objectives of art. 194 TFEU-, while Member States

are free either to take action in the relevant field, in case that EU has ceased or has not

begun its own action or to take additional measures going beyond EU minimum

regulation –but without violating this minimum standard set by EU-.21

Of course, the principles of subsidiarity and proportionality, which binded the

competence of the EU legislator, under the old art. 3b TEU22

, art. 5 TEC23

and art. 95

TEC,24

are still binding under the new Treaty.25

18

Look also about the evolution of the idea of the inclusion of energy in the list of competences of EU

to L. Hancher, ‘‘The New EC Constitution and the European Energy Market’, in M. Roggenkamp and

U. Hammer (eds), European Energy Law Report II (Antwerp: Intersentia, 2005). 19

Art. 4.2 TFEU. 20

Art. 194.1 TFEU: ‘In the context of the establishment and functioning of the internal market and with

regard for the need to preserve and improve the environment, Union policy on energy shall aim, in a

spirit of solidarity between Member States, to:

(a) ensure the functioning of the energy market;

(b) ensure security of energy supply in the Union;

(c) promote energy efficiency and energy saving and the development of new and renewable forms of

energy; and

(d) promote the interconnection of energy networks.’ 21

http://europa.eu/scadplus/european_convention/competences_en.htm#COMPETENCES 22‘The Community shall act within the limits of the powers conferred upon it by this Treaty and of the

objectives assigned to it therein.

In areas which do not fall within its exclusive competence, the Community shall take action, in

accordance with the principle of subsidiarity, only if and in so far as the objectives of the proposed

action cannot be sufficiently achieved by the Member States and can therefore, by reason of the scale

or effects of the proposed action, be better achieved by the Community.

Any action by the Community shall not go beyond what is necessary to achieve the objectives of this

Treaty.’ 23 Same as above (art. 3b TEU.)

6

Principle of Subsidiarity

According to the principle of subsidiarity, EU will refrain from taking any action, in

case that a specific issue can be handled more efficiently at a national or local level –

the principle actually concerns shared competence-,26

while EU should not take

measures exceeding the extent of intervention, which is necessary for the fulfillment

of Treaty objectives (principle of necessity)27

. Therefore, there are two conditions that

should be fulfilled, in order that a EU measure in a field of shared competence does

not violate the principle of subsidiarity.28

The objectives of the measure under

question cannot be sufficiently achieved by the Member States,29

while they can be

successfully achieved by EU due to the scale or effects of the measure (and the nature

of the problem as well). It is clear that this principle puts a limit to EU competence

and gives priority to local policies where possible.

Therefore, at this point there is the question whether ownership unbundling as a

measure of the Third Energy Package is an action that was legitimately taken by EU,

under the perspective of EU’s competence and especially of the subsidiarity and

proportionality principle. As we observed, especially after Lisbon Treaty30

energy

constitutes an issue of clear –shared- competence of EU and EU has in principle the

power to legislate –at least regarding some minimum standards- concerning this field.

Henceforth there is no reason to examine the debate about whether there are obstacles

regarding the internal energy market and whether ownership unbundling can

effectively address the relevant problems, under the perspective of 114 TFEU.

However, the same questions have still to be answered, in order to examine ownership

unbundling, under the spectrum of proportionality and subsidiarity. Regarding the

principle of proportionality (and necessity as well), we will extensively analyse it in a

24

J. Pielow and E. Ehlers, ‘Ownership unbundling and constitutional conflict: a typical German

debate?’, 10; M. Hunt, ‘Ownership Unbundling: the Main Legal Issues in a Controversial Debate’, 71. 25 Art. 1 Protocol on the application of the principles of subsidiarity and proportionality, Treaty of

Lisbon amending the Treaty on European Union and the Treaty establishing the European Community

(17.12.2007), C 306/150: ‘Each institution shall ensure constant respect for the principles of

subsidiarity and proportionality, as laid down in Article 3b of the Treaty on European Union.’

26 P. Craig and G. De Búrca, EU law: text, cases, and materials 4th ed., (Oxford: OUP, 2008), 100;

look also to http://www.europarl.europa.eu/factsheets/1_2_2_en.htm. 27

ECJ, Case C-103/01, Commission/Germany [2003] ECR, p. I-5369, at 48. 28

ECJ, Case C-84/94, United Kingdom of Great Britain and Northern Ireland v Council of the

European Union, (12 November 1996), ECR I-5755; ECJ, Case C-233/94, Federal Republic of

Germany v European Parliament and Council of the European Union (13 May 1997) ECR I-2405. 29

Given of course that national measures are so insufficient that may create a problem regarding the

objective. ECJ, C-300/89, Titanium Dioxide [1991] ECR, p. I-2867, at 23. 30 Entered into force on 1 December 2009. http://europa.eu/lisbon_treaty/glance/index_en.htm

7

separate chapter. At this point we will just examine whether the objectives pursued by

ownership unbundling cannot truly be addressed by national initiatives and required

such an extensive EU intervention.31

According to an opinion, the existence of a real problem regarding competition in

energy market is doubtful, at least after the Second Energy Package –which provided

for less radical measures of unbundling than these included in the Third Energy

Package.32

This opinion is based on the assumption33

that the former regulatory

framework was sufficient enough and in case that there was time for its application,

the problems observed in the Sector Inquiry would be rather limited. According to this

argument, if national authorities had time to act in the former internal energy market

framework, it would have been proven that the objectives of internal energy market

would be fulfilled by Member States, without any further EU action being necessary34

(therefore, the new regulation violates subsidiarity principle).35

This opinion actually

judges the Third Energy Package as a hasty and premature action36

and leads to the

conclusion that the idea for such a further step should be implemented only after the

existence of clear evidence that the former –and less strict- framework was not

effective.

According to a second opinion,37

it is questionable whether EU authorities are better

suited than national authorities to address issues of the internal energy market,

because of the fact that there are specific features in each national market –that make

them a distinct case-, because the markets are still mostly organised at a national

level, because some markets may not include some characteristics as those addressed

by ownership unbundling, such as high vertical integration of the transmission and

because of the strategic element within energy policy. Based on these arguments, this

opinion suggests that a stronger regulation at a national level could remove the

obstacles in the markets and make EU’s intervention unnecessary.

31

This is a matter of both proportionality –and necessity- and subsidiarity. 32

J. Pielow and E. Ehlers, ‘Ownership unbundling and constitutional conflict: a typical German

debate?’, 10. 33 ibid, 11. 34

ibid 11-12, where the authors refer to several examples from local authorities that provide

encouraging initial evidence –according to the authors- for the potential of the former framework and

of national initiatives. 35 It also challenges the existence of serious continuing obstacles in the current energy market. J.

Pielow, G. Brunekreeft and E. Ehlers, ‘Legal and economic aspects of ownership unbundling in the

EU’, 104. 36

And Sector Inquiry as not being up-to-date. ibid, 104. 37 M. Hunt, ‘Ownership Unbundling: the Main Legal Issues in a Controversial Debate’, 71.

8

EC.

We disagree with both the opinions above. Regarding the second one, we could first

answer that in any kind of market there are specific national characteristics.

According to this argument, in merely no field could EU take action, because of the

principle of subsidiarity. Energy markets differ of course from one country to the

other; however these differences are not so important that could prohibit a coordinated

European action. Indeed, vertical integration, high market concentration, lack of

transparency in gas and electricity markets, deficiencies of the regulatory framework

concerning TSOs and national regulators and problems deriving from formerly or

currently publicly held operators and undertakings constitute common issues in many

Member States.38

Furthermore, other problems, such as the lack of cross-border

cooperation between TSOs and national regulators and other authorities, have in their

own nature a cross-border character. National Regulators have been generally proven

ineffective under the previous organization framework and the bridging of the various

regulatory gaps39

regarding the powers and authorities of national regulators and the

framework of cooperation and coordination between them and between the TSOs at a

regional and European level has been proven a very important issue.40

The Member

States without any apparent high market concentration or vertical integration were the

minority of the cases examined. Although each country has its own model of energy

market organization –and perhaps different energy supply sources and mixture-, in

general the same patterns are widely followed either regarding market structure or

energy sources.

Besides, the Third Energy Package did not call for assimilation of all separate local

and national cases; it rather suggests a model –including many alternatives- of

organization and supervision of the markets and of the regulatory and controlling

procedures that may improve competition in general, throughout Europe. Specific

38

For further details look to Commission (EC), ‘DG Competition Report on Energy Sector inquiry’ (10

January 2007) COMP SEC (2006) 1724, 12. 39

Actually, one difficult question is whether this problem of gaps is going to be effectively resolved in

future, after the Third Energy Package and its multiple provisions regarding cooperation and cross-

border and regional networking of the regulators and other competent authorities. Therefore, we think

that it is at least superficial to claim that such problems did not exist before the Third Package or –if

existed- could be solved by mere national initiatives. 40

C. Jones, The Internal Energy Market: The Third Liberalisation Package (Leuven: Claeys &

Casteels, 2010), 5-7.; P. Cameron, Competition in Energy Markets: Law and Regulation in the

European Union, (New York: OUP, 2007), 297-300.

9

provisions, such as the ITO+ model,41

which gives Member States the freedom to

develop more advanced and effective unbundling models, expressed derogations from

unbundling provided for specific small countries42

and emerging markets,43

the

provision of granting similar exemptions –by the Commission- for small isolated

systems,44

emergent regions45

and for Member States that have recently acceded to

the EU,46

the important role of ENTSOs within the regulation and supervision of

transmission47

, the provision for regional regulatory authorities,48

the provisions for

ownership unbundling without privatization in case of publicly owned undertakings –

examined in a subsequent chapter-, the level playing field clause,49

aiming at the

protection of Member States that apply full ownership unbundling and the provision

for the special procedure of certification for non-EU companies wishing to acquire an

EU TSO, aiming at protecting the EU’s strategic interests, are all examples in which

the Third Energy Package respected specific local and national particularities,

sensitive interests and strategic issues and gave priority to national, local and regional

self-organisation and initiative. Furthermore, the fact that the Third Energy Package

does not impose ownership unbundling as one and single option but also offers other

alternatives –ITO, ISO and ITO+/ ITO a la carte (mentioned above)- shows that EU’s

initiative was not meant to displace national initiative but to offer solutions for the

goal of the internal market, from which the Member States will be free to choose what

fits best to their national objectives.

Regarding the first opinion, we should first mention that it is based on an ambiguous

and hypothetic assumption that Member States if left alone would develop better

solutions than EU’s initiative and would remove obstacles. The examples cited as

evidence supporting the argument above,50

refer only to a few Member States and

actually focus on some specific aspects of energy markets’ problems. In no case such

examples can constitute evidence that a complete and integrated framework of

41

Art. 9.9 Dir. 2009/72/EC and art. 9.9 Dir. 2009/73/EC. 42

Art. 44.2 Dir. 2009/72/EC and art. 49.6 Dir. 2009/73/EC. 43

Art. 49.2 Dir. 2009/73/EC. 44 Art. 44.1 Dir. 2009/72/EC. 45

Art. 49.4, 49.5 Dir. 2009/72/EC and art. 49.7, 49.8 Dir. 2009/73/EC. 46

C. Jones and W. Webster (updated by E. Cabau), Derogations and Exemptions: The internal Energy

Market: The Third Liberalisation Package, 444-445. 47 Art. 6 Reg. No 713/2009, art. 6, 8 Reg. No 714/2009, art. 6, 8 Reg. No 715/2009. 48

Art. 39.2 Dir. 2009/72/EC and art. 35.2 Dir. 2009/73/EC. 49

Art. 43, art. 9.12 Dir. 2009/72/EC. 50

J. Pielow and E. Ehlers, ‘Ownership unbundling and constitutional conflict: a typical German

debate?’, 10-11.

10

solutions for the numerous aspects of internal energy market –that treated the relevant

issues as related rather than isolated and irrelevant issues- was not necessary. Besides,

they do not offer any evidence about the supposed value of the former EU framework.

On the other hand, Sector Inquiry provided clear evidence that the former framework

along with the national regulation had not achieved much. Even if we accept that

Sector Inquiry was not up-to-date, it provided the only clear and analytical material –

examining all the aspects concerning the internal market- for a decision to be taken

about the future steps towards EU energy objectives; therefore, even if we doubt

about its conclusions there was no other material to be taken into consideration and of

course any relevant decision should be based on relevant analytical material.

Furthermore, even this argument –that Sector Inquiry was not up-to-date- is

vulnerable. Given that it had already provided discouraging answers about the results

of the previous framework, if EU had to wait for a more recent report of the same

scale –and given that it is not possible to conduct such a report every second year-, we

should have waited for nearly a decade –given the time needed for consultation and

for preparation for the application of the new framework- in order to proceed to a

change of European energy policy. At the same time, more recent competition law

cases in the energy market –as these examined in the other paper- just affirmed the

results of the Sector Inquiry and the persistence of the already recognized problems,

especially regarding vertical integration.51

As energy is a very important sector for the

internal market and as the process towards the internal energy market already faces

serious obstacles, it would not be rational to spend so much time, in order just to

check if the Sector Inquiry’s results would be affirmed by a subsequent report.

Actually, it is impossible to know whether the situation in European Energy Market

would be improved or not without the Third Energy Package and any relevant

argument is just hypothetical; the only clear evidence showed that this was not the

case, so the opinion above seems quite baseless.

On the other hand, what was made clear from Sector Inquiry concerned the

inadequacy of rules focusing on behavioural rather than structural aspects of the

energy market52

, the importance of the creation of a ‘level playing field’ for energy

51

K. Talus and A. Johnston, ‘Comment on Pielow, Brunekreeft and Ehlers on ‘ownership unbundling”,

7. 52

ibid, 4, where the authors argue that ownership unbundling provides the necessary commercial

incentives for independent action of TSOs.

11

undertakings53

and the need for radical changes, in order that the healthy

consolidation of European Energy Market could be achieved.54

It also affirmed that

the problems of the internal energy market –as being generally common in all

Member States and as energy market becomes more and more interconnected under

technical and structural terms- need an overall, common and general European

framework of solutions.

Conclusions

Therefore, we believe that ownership unbundling as a measure of the Third Energy

Package, does not oppose subsidiarity principle and seems to fulfil in general all the

competence related conditions –proportionality will be examined later-, as energy

constitutes a field of primary EU interest and a key part of the overall effort for the

internal market, as the measure is designed to address a set of complex and continuing

problems that had not been resolved by national means –which seem inadequate

without a central coordination- and as there is strong evidence that ownership

unbundling –although not undoubtedly proven as the most efficient solution (see also

in the chapter about proportionality)- and generally radical structural remedies seem

to constitute a much more promising set of solutions55

than these previously applied.

53

Dir. 2009/72/EC Preamble, par. 7 and Dir. 2009/73/EC Preamble, par. 5. 54 N. Kroes, ‘Competition in the energy sector: Preliminary results of the Commission’s inquiry and

next steps in anti-trust enforcement’, Speech at the First Annual Seminar and Conference on Energy

Law and Policy (Brussels, 9 March 2006). 55

K. Talus and A. Johnston, ‘Comment on Pielow, Brunekreeft and Ehlers on ‘ownership unbundling”,

4, 7.

12

FREEDOM OF MOVEMENT OF CAPITAL & FREEDOM OF

ESTABLISHMENT

Content of the Freedoms and Relation between them

Freedom of capital movement56

and freedom of establishment57

constitute two major

principles of EC Law. Both freedoms focus on the freedom of a person to invest in

other Member States. Although the first freedom refers to a broad category of capital

movements,58

the concept of the right of establishment involves the actual pursuit of

an economic activity through a fixed establishment in another Member State for an

indefinite period.59

According to an opinion expressed by Advocate-General Alber60

these two freedoms can be distinguished upon the issue whether the investor starts

becoming involved in the undertaking under question, rather than just investing in the

undertaking’s capital (definite influence criterion61

).62

Recent case law has also taken

into consideration the purpose of the legislation, when trying to answer the freedom

56

Art. 63.1 TFEU (former art. 56 EC): ‘Within the framework of the provisions set out in this Chapter,

all restrictions on the movement of capital between Member States and between Member States and

third countries shall be prohibited.’ 57

Art. 49 TFEU (former art. 43 EC): ‘Within the framework of the provisions set out below,

restrictions on the freedom of establishment of nationals of a Member State in the territory of another

Member State shall be prohibited. Such prohibition shall also apply to restrictions on the setting-up of

agencies, branches or subsidiaries by nationals of any Member State established in the territory of any

Member State.

Freedom of establishment shall include the right to take up and pursue activities as self-employed

persons and to set up and manage undertakings, in particular companies or firms within the meaning

of the second paragraph of Article 54, under the conditions laid down for its own nationals by the law

of the country where such establishment is effected, subject to the provisions of the Chapter relating to

capital.’ 58 Look to Annex I to Council Directive 88/361/EEC of 24 June 1988 for the implementation of Article

67 of the Treaty [article repealed by the Treaty of Amsterdam] (OJ 1988 L 178, p. 5), ECJ, 452/04

Fidium Finanz [2006], par. 5, ECJ, 483/99 Commission v French Republic [2002] and ECJ, 503/99

Commission v Kingdom of Belgium [2002]. 59 ECJ, 221/89, Factortame, par. 20. 60

ECJ, Opinion of Advocate General Alber delivered on 14 October 1999, Case C-251/98, C. Baars v

Inspecteur der Belastingen/Ondernemingen Gorinchem. 61

M. Hunt, ‘Ownership Unbundling: the Main Legal Issues in a Controversial Debate’, 79. 62 ECJ, Opinion of Advocate General Alber Case C-251/98, 26-30: “…1. Where the free movement of

capital is directly restricted such that only an indirect obstacle to establishment is created, only the

rules on capital movements apply.

2. Where the right of establishment is directly restricted such that the ensuing obstacle to

establishment leads indirectly to a reduction of capital flows between Member States, only the rules on

the right of establishment apply.

3. Where there is direct intervention affecting both the free movement of capital and the right of

establishment, both fundamental freedoms apply, and the national measure must satisfy the

requirements of both.”

13

within which this legislation falls (legal purpose criterion).63

Recent literature and

case law seems to accept that both principles can apply simultaneously to most cases,

except for those where it is clear that the situation under question is related to definite

influence on the undertaking.64

Generally, concerning investment in energy

infrastructure, each restriction to the freedom of establishment will also constitute a

restriction to the capital movement, as capital movement is a condition for investing

in an energy asset, uptaking its control and exploiting it. On the other hand, not all

restrictions to capital movement can result to restrictions to the freedom of

establishment, as establishment requires extended and definite control –more than a

simple capital investment- over the asset. However, it is irrelevant to our study

whether a situation is related to one freedom or the other or both.65

Acceptable Restrictions to the Freedoms

Generally, as ownership unbundling refers to the complete ownership separation of

specific business activities, it certainly creates a limitation to both freedoms. Freedom

of capital movement is limited, as companies which own specific assets (transmission

or generation) cannot invest on or have to disinvest from other assets; freedom of

establishment is limited as these companies cannot maintain subsidiaries or own

undertakings involved in specific activities.66

Therefore, ownership unbundling

excludes specific companies from a series of activities, declares a series of activities

as incompatible to each other and forces companies involved in these activities to

dispose specific assets and investments.

However, EU Law accepts that restrictions to both freedoms may be justified under

specific circumstances. Art. 5167

and 5268

TFEU (former 45 and 46 TEC) provide a

63 M. Hunt, ‘Ownership Unbundling: the Main Legal Issues in a Controversial Debate’, 80, where

Lasertec (Case 492/04 Lasertec [2007] and Holbock (Case C-157/05 [2007]) cases are cited. 64

ibid, 81 where the Opinion of Advocate General Kokott (delivered on 15 February 2007) Case C-

464/05 Maria Geurts and Dennis Vogten v Belgische Staat is cited. 65 We should however note that according to art. 63 TFEU, freedom of capital movement also concerns

non EU nationals. Look also to ECJ, Joined cases C-163/94, C-165/94 and C-250/94 Sanz de Lera

[1995]. 66

The concept of establishment within the meaning of Art. 49 TFEU involves the actual pursuit of an

economic activity through a fixed establishment in another MS for an indefinite period (ECJ, Case C-

221/89 Factortame) and refers to the right to purchase, exploit and transfer real and personal property

(ECJ, Case C-63/86 COM v. Italy). 67

“The provisions of this Chapter shall not apply, so far as any given Member State is concerned, to

activities which in that State are connected, even occasionally, with the exercise of official authority.”

14

number of reasons for derogations from the rule of 49 TFEU. Art. 65 TFEU69

(former

art. 58 TEC) provides reasons for derogation from the rule of 63 TFEU. A combined

study of art. 51, 52 and 65 TFEU shows that reasons related to public interest, such as

public safety, public security, public health and public policy can provide acceptable

reasons for the limitation of the freedoms of capital movement and establishment.

Moreover, ECJ has also accepted in the Case Commission v Italian Republic70

that the

freedom of capital movement can be restricted on the grounds of “strengthening the

competitive structure of the… (energy) market…”.71

The need for the opening of the

energy market is recognised as a sufficient reason that can justify limitations of the

freedoms of establishment and capital movement.72

In a series of other cases, ECJ has

also accepted that reasons of public interest highly related to energy policy can justify

a limitation of these freedoms.73

In Commission v French Republic74

ECJ accepted

that75

“the safeguarding of supplies of petroleum products in the event of a crisis,

falls undeniably within the ambit of a legitimate public interest. Indeed, the Court has

previously recognised that the public-security considerations which may justify an

obstacle to the free movement of goods include the objective of ensuring a minimum

supply of petroleum products at all times (Campus Oil, paragraphs 34 and 35). The

same reasoning applies to obstacles to the free movement of capital, inasmuch as

public security is also one of the grounds of justification referred to in Article

73d(1)(b) of the Treaty”.76

Therefore, EU jurisprudence seems to accept that energy policy –concerning either

the issue of energy security or opening to competition- constitutes a sufficient

68

“The provisions of this Chapter and measures taken in pursuance thereof shall not prejudice the

applicability of provisions laid down by law, regulation or administrative action providing for special

treatment for foreign nationals on grounds of public policy, public security or public health.” 69 “The provisions of Article 63 shall be without prejudice to the right of Member States:

(a)to apply the relevant provisions of their tax law which distinguish between taxpayers who are not in

the same situation with regard to their place of residence or with regard to the place where their capital

is invested;

(b)to take all requisite measures to prevent infringements of national law and regulations, in particular

in the field of taxation and the prudential supervision of financial institutions, or to lay down

procedures for the declaration of capital movements for purposes of administrative or statistical

information, or to take measures which are justified on grounds of public policy or public security.” 70 ECJ, C-174/04 Commission v Italian Republic 71

ibid, par. 37. 72

M. Hunt, ‘Ownership Unbundling: the Main Legal Issues in a Controversial Debate’, 86-87. 73

Look for example to ECJ Case 72/83, Campus Oil Ltd v Minister for Industry and Energy [1984],

especially par. 32-51 about energy security; 74

ECJ, Case C-483/99, Commission of the European Communities v French Republic [2002] 75

ibid par. 47. 76

ECJ, Case C-503/99, Commission of the European Communities v Kingdom of Belgium [2002]

repeated the same argument (look to par. 46).

15

background that can support derogations from the principle of free establishment and

free movement of capital.

However, these derogations can only be accepted under specific circumstances. First,

the derogation has to be non-discriminatory.

Principle of Non-Discrimination

Both Treaties –in a series of different provisions -and ECJ case law77

accept the

existence of a principle of non discrimination in EU Law. A number of provisions in

the Treaties manifest the principle of equality. Articles 18-25 TFEU generally prohibit

discrimination, while other Treaty articles provide for non-discrimination in particular

fields. 78

Art. 49 TFEU explicitly provides for non-discrimination based on nationality

regarding establishment, while art. 55 TFEU (former art. 294 TEC) prohibits

discrimination based on nationality regarding the participation in companies’

capital.79

ECJ traditionally accepts that non-discrimination belongs to a series of

general principles of EU Law, inspired by Member States’ constitutional traditions.80

The protection of art. 49 TFEU is explicitly expanded on companies according to art.

54 TFEU (former art. 48 TEC).81

It is well established case law that the general non-discrimination principle is among

these general principles of community law. According to this principle, similar

situations shall not be treated differently unless differentiation is objectively

justified82

and different situations shall not be treated in the same way.83

77 Look for example to Second Skimmed-Milk Powder Case (ECJ HNL v Council and Commission

83/76,94/76, 4/77,15/77,40/77 [1978]) and T. Hartley, European Union law in a global context: text,

cases and materials (Cambridge: CUP, 2004), 383 (discrimination between different categories of

farmers); ECJ, 130/75, Prais v. Council [1976] (minority discrimination); ECJ, 21/74 Airola v

Commission [1975] (sexual discrimination); ECJ, joint Cases 124/76 and 20/77,Moulins Pont à

Mousson and others, [1977] (trade discrimination); ECJ, 212/97, Centros [1999] (discrimination due to

the national law of establishment). 78

Look for example to art. 40.2 and 45.2 TFEU. 79

“Member States shall accord nationals of the other Member States the same treatment as their own

nationals as regards participation in the capital of companies or firms within the meaning of Article 54,

without prejudice to the application of the other provisions of the Treaties. ” 80

ECJ, Judgement of 17 December 1970, Case 11/70, Internationale Handelsgesellschaft, [1970]. 81

“Companies or firms formed in accordance with the law of a Member State and having their

registered office, central administration or principal place of business within the Union shall, for the

purposes of this Chapter, be treated in the same way as natural persons who are nationals of Member

States. "Companies or firms" means companies or firms constituted under civil or commercial law,

including cooperative societies, and other legal persons governed by public or private law, save for

those which are non-profit-making.” 82 ECJ, joint Cases 117/76 and 16/77, Ruckdeschel and others, [1977].

16

Therefore, we have to examine whether ownership unbundling creates indeed a

discrimination against specific undertakings. It seems that ownership unbundling, as

imposed by the Third Energy Package as a general measure of European Energy Law,

addressed to all undertakings concerned throughout the European Union –which

henceforth constitute a non-predefined group of undertakings, specified according to

general and uniform rules- no matter where their establishment is and who their

shareholders are, does not impose a discriminatory measure. However, according to

an opinion,84

although ownership unbundling is an indistinctly applicable measure, it

may result to discriminatory results, as private undertakings may be in a worse

position in comparison to public undertakings in other Member States. The reason for

this discrimination concerns art. 345 TFEU –which we are going to examine later-

and the protection of property rights according to Member States ownership rules. We

could also argue that discrimination may be caused due to the character of ownership

unbundling as a measure within the Third Energy Package. As explained above,

although ownership unbundling is the standard solution of the Third Energy Package,

there is also provision for a number of more favourable –for the undertakings- and

less strict alternatives. We could argue that a company active in Member State X,

which applies full ownership unbundling, would be in a less favourable position than

another company active in Member State Z, which applies a more lax unbundling

system, such as the ITO model. Of course, the level playing field clause may offer

some protection to the first company, in case that undertakings controlling generation

or supply activities in one member state try to exercise direct or indirect control over a

TSO from another member state that has opted for full ownership unbundling.85

However, this provision does not put the company from State X in the same position

as the second company, in terms of the general European Market; it just secures equal

rights to companies entering the same market. Although the two arguments above

provide a basis for criticism concerning the possible results of the application of

ownership unbundling, they cannot negate the non-discriminatory character of the

83 ECJ, 283/83, Racke, [1984]; ECJ, joint Cases 124/76 and 20/77, Moulins Pont à Mousson and

others, [1977], par. 16-17. 84

M. Hunt, ‘Ownership Unbundling: the Main Legal Issues in a Controversial Debate’, 86. 85

EU Commission, Commission Staff Working Paper, Interpretative Note on Directive 2009/72/EC

Concerning Common Rules for the Internal Market in Electricity and Directive 2009/73/EC

Concerning Common Rules for the Internal Market in Natural Gas ‘The Unbundling Regime’,

Brussels, 22 January 2010, 5, available at

http://ec.europa.eu/energy/gas_electricity/interpretative_notes/doc/implementation_notes/2010_01_21_

the_unbundling_regime.pdf.

17

measure at least in principle, as they actually concern possible results that may occur

in future.

The second condition for the justification of derogations from the freedoms of capital

movement and establishment refers to the principle of proportionality. The

accordance of ownership unbundling with this principle will be examined separately,

as it is related to other issues, such as protection of property, which we will analyse

below.

ART. 345 TFEU

Content of the Provision

According to art. 345 TFEU (former 295 TEC) ‘The Treaties shall in no way

prejudice the rules in Member States governing the system of property ownership.’

That means that Member-States are free to regulate ownership rights, according to

their national policy and goals and EU cannot interfere. According to ECJ however,

this right of the Member States does not mean that this regulation can oppose the

fundamental EU policies, goals and principles.86

On the other hand, this means that

EU can take measures that affect property rights, if these measures are designed to

86 ECJ, Case C-452-01, Margarethe Ospelt and Schlössle Weissenberg Familienstiftung, at 24: ‘…such

a system remains subject to the fundamental rules of Community law, including those of non-

discrimination, freedom of establishment and free movement of capital’; ECJ, Case C-182/83 Fearon

[1984] ECR 3677, at 7: ‘Consequently , although article 222 of the treaty does not call in question the

member states ' right to establish a system of compulsory acquisition by public bodies , such a system

remains subject to the fundamental rule of non-discrimination which underlies the chapter of the treaty

relating to the right of establishment .’; ECJ, Case C-503/04, Commission/Germany, (2007) at 37:

With regard, thirdly, to Article 295 EC, according to which ‘this Treaty shall in no way prejudice the

rules in Member States governing the system of property ownership’, it should be recalled that that

article does not have the effect of exempting the Member States’ systems of property ownership from

the fundamental rules of the Treaty.’; ECJ, Case C-463/00 Commission v Spain [2003] ECR I-4581 at

67:’ However, those concerns cannot entitle Member States to plead their own systems of property

ownership, referred to in Article 295 EC, by way of justification for obstacles, resulting from privileges

attaching to their position as shareholder in a privatised undertaking, to the exercise of the freedoms

provided for by the Treaty. That article does not have the effect of exempting the Member States'

systems of property ownership from the fundamental rules of the Treaty.’; ECJ, Case C-483/99

Commission v France [2002] ECR I-4781 at 44; ECJ, Case C-503/99 Commission v Belgium [2002]

ECR I-4809 at 44; ECJ, Case C-300/01 Salzmann [2003] ECR I-4899 at 39: ‘As a preliminary point, it

must be recalled that, although the legal regime applicable to property ownership is a field of

competence reserved for the Member States under Article 222 of the EC Treaty (now Article 295 EC),

it is not exempted from the fundamental rules of the Treaty (Konle , paragraph 38). Thus, national

measures such as those at issue in the main proceedings, which regulate the acquisition of land for the

purposes of prohibiting the establishment of secondary residences in certain areas, must comply with

the provisions of the Treaty on the free movement of capital’.; ECJ, Case C-302/97, Konle [1999] ECR

I-3099 at 38; ECJ, Case 182/83 Fearon v Irish Land Commission [1984] ECR 3677 at 7.

18

serve fundamental EU goals.87

Improvement of competition in the European energy

market certainly is an issue that falls within the key objectives of EU and can justify

measures that affect property rights. What art. 345 TFEU prohibits is the imposition

of nationalisations or privatisations by EU and the intervention into domestic

ownership legal orders, except if the latter are opposed to specific fundamental EU

principles.88

Ownership Unbundling and Publicly Held Undertakings in relation to 345 TFEU

One could argue that as ownership unbundling asks for an ownership separation of

assets, public undertakings will have to privatise their own utilities; therefore there is

an infringement of art. 345 TFEU. However, this is not true. Publicly held generation

and transmission assets do not have to be privatised, as it would be enough to apply

measures that guarantee effective separation of each activity from the other.89

For

example, transfer of the assets to different ministries or independent public authorities

would be sufficient, as long as these two different public bodies can be assumed –and

function- as distinct entities.90

Therefore, Member States are still free to choose the

model for organisation of the transmission or generation market –either public or

private-.91

Moreover, ownership unbundling is designed to apply –according to the Third Energy

Package- to both public and private undertakings. Therefore, there is no

discrimination issue in principle.92

Such a problem can however occur, if we consider

the case of cross-border competition between private undertakings from Member

States that have applied full privatisation and public undertakings from Member

87

J. Pielow and E. Ehlers, ‘Ownership unbundling and constitutional conflict: a typical German

debate?’, 13-14, who name internal market as one objective that can justify such measures.; 87

K. Talus

and A. Johnston, ‘Comment on Pielow, Brunekreeft and Ehlers on ‘ownership unbundling”, 4, who

comment that it is rational to expect that to some extent property law is going to be unified, on the

grounds of economic unification and the establishment of the internal market. 88

M. Hunt, ‘Ownership Unbundling: the Main Legal Issues in a Controversial Debate’, 72. 89

ibid, 72; J. Pielow and E. Ehlers, ‘Ownership unbundling and constitutional conflict: a typical

German debate?’, 14, who also argue that this is not the case for municipal or communal networks –as

they are not organised into different ministries- and the only applicable solution for them would be ISO

–and ITO we could suggest- model. 90

E. Cabau, ‘Unbundling of Transmission System Operators’ in C. Jones (eds.) The Internal Energy

Market: The Third Liberalisation Package, 142-143. 91

K. Talus and A. Johnston, ‘Comment on Pielow, Brunekreeft and Ehlers on ‘ownership unbundling”,

4. 92

M. Hunt, ‘Ownership Unbundling: the Main Legal Issues in a Controversial Debate’, 72; E. Cabau,

‘Unbundling of Transmission System Operators’, 141.

19

States that have preferred to retain both generation and transmission under public

control. As it is possible that both these activities could be put under public control –

even by two different public bodies-, the private company from the first country

would be possibly found in a difficult position, regarding their effort to enter the

market of the second country, as in the latter all the relevant assets would be publicly

held93

and the relevant public undertakings could have a competitive advantage due to

the coordination of their activities and their synergies.94

Besides, the public

undertaking from the second country would be in an equal position to a domestic

private undertaking, if the first would enter the market of the first country; therefore

there would be an equal treatment against undertakings from countries that have

preferred privatisation.95

We can answer that although in the second country the relevant assets would be

controlled by public bodies, these two bodies –according to the Third Energy

Package- should be administered in a totally separate way –as two distinct persons-;96

general competition rules –e.g. art. 101 TFEU about concerted practices- and sector

rules of the Third Energy Package about Third Party Access and Certification

Procedure97

as well as the active role of Regulators can further guarantee that such

phenomena of discrimination against private companies from third countries will not

occur.

Conclusions

Although the provisions above show that ownership unbundling as a measure of the

Third Energy Package does not nominally –at least- violate art. 345 TFEU especially

regarding the non-discrimination aspect of the Treaty rule, we should admit that in

practice it is likely that effective separation of activities in Member States where both

93

M. Hunt, ‘Ownership Unbundling: the Main Legal Issues in a Controversial Debate’, 73. 94 J. Pielow and E. Ehlers, ‘Ownership unbundling and constitutional conflict: a typical German

debate?’, 15. 95

The ‘level playing field’ clause, mentioned above, may not apply to this case as it refers to cases

where Member States chose a different unbundling model –ISO, ITO, full-, while in this case both

Member States may have applied the same model with the exception that one of them has retained the

activities under public control. 96

E. Cabau, ‘Unbundling of Transmission System Operators’, 142-143, who actually refers to ‘strong

legal safeguards’ against the violation of ownership unbundling rules. 97 ibid, 142.

20

generation and transmission will be publicly held will be a difficult task and that

discriminatory effects as the one described above may occur.

Therefore, we conclude that in principle ownership unbundling does not violate art.

345 TFEU.

FUNDAMENTAL RIGHTS AND ESPECIALLY THE RIGHT TO PROPERTY

Legal Basis for the Protection of the Right to Property in EU

In this chapter we examine the compatibility of ownership unbundling with some

fundamental EU rights and especially with the right to property.

According to art. 1 of the 1st

Protocol of the European Convention of Human Rights

(ECHR) property98

is recognised as a fundamental human right and no deprivation of

this property can be ordered, unless there are reasons of justified public interest.99

Property is also recognised as a fundamental right by the Charter of Fundamental

Rights of the European Union100

, which also recognises that nobody can be deprived

of it except if there are reasons of public interest and the person is fairly

compensated.101

According to art. 6.2 of old TEU, EU recognises the rights included

in the Charter of Fundamental Rights102

and accepts as general principles of European

Law all freedoms protected by ECHR and deriving from the common constitutional

traditions of Member States.103

Moreover, especially after the recent Lisbon Treaty,104

98 Covering any kind of interests and rights that constitute asses. ECtHR, Iatridis v Greece, Judgement

of 25th

March 1997, 30 EHRR 97, at 54. 99

Art. 1, 1st

Protocol ECHR: ‘Every natural or legal person is entitled to the peaceful enjoyment of his

possessions. No one shall be deprived of his possessions except in the public interest and subject to the

conditions provided for by law and by the general principles of international law.

The preceding provisions shall not, however, in any way impair the right of a State to enforce such

laws as it deems necessary to control the use of property in accordance with the general interest or to

secure the payment of taxes or other contributions or penalties.’ 100 18.12.2000 (OJ C 364/01) 101

Art. 17.1 Charter of Fundamental Rights of the European Union: ‘Everyone has the right to own,

use, dispose of and bequeath his or her lawfully acquired possessions. No one may be deprived of his

or her possessions, except in the public interest and in the cases and under the conditions provided for

by law, subject to fair compensation being paid in good time for their loss. The use of property may be

regulated by law in so far as is necessary for the general interest.’ 102

We have to note that ECHR binds all the states that ratify it as far as their national law is concerned

while the Charter refers to the institutions and bodies of EU

and to the Member States only when they implement EU law. Art. 51.1 Charter of Fundamental Rights

of the European Union. 103

Art. 6 of the former TEU: ‘(1) The Union recognizes the rights, freedoms and principles set out in

the Charter of Fundamental Rights of the European Union of 7 on the 12th December 2000 December

2007 are set out as adapted at Strasbourg, and the Charter of Fundamental Rights and the contracts

21

the path towards the official accession of EU to ECHR opened and the details about

this procedure were defined;105

therefore, this official accession is generally a matter

of time.106

Furthermore, all Member States’ constitutions include relevant provisions

regarding the protection of property rights and property is also recognised as a

national fundamental right.107

Therefore, property is a protected right under European

Law and ECJ examines any possible harm caused by EU measures to property

rights.108

Possible Violations of Fundamental Rights

Ownership unbundling apparently constitutes a deprivation of property, as the

undertakings are requested to transfer some of their property assets –transmission

network or generation infrastructure- to third parties.109

The property of energy

companies is also protected by ECHR, as they have a legal personality and property

are legally equal. The provisions of the Charter set out in the contracts the Union's powers be

expanded in any way.The principles set out in the Charter rights, freedoms and principles laid out in

the general provisions of Title VII of the Charter governing its interpretation and application, and

taking into account the mentioned in the Charter of explanatory notes to the sources of those specified.

(2) The Union shall accede to the European Convention on Human Rights and Fundamental Freedoms.

This candidate does not change the responsibilities set out in the treaties of the Union.

(3) The fundamental rights as guaranteed by the European Convention on Human Rights and

Fundamental Freedoms and as they result from the constitutional traditions common to the Member

States, as general principles of Union law.’ 104

Treaty of Lisbon amending the Treaty on European Union and the Treaty establishing the European

Community, signed at Lisbon, 13 December 2007, Protocol relating to Article 6(2) of the Treaty on

European Union on the accession of the Union to the European Convention on the Protection of

Human Rights and Fundamental Freedoms. 105

Look to art. 218.6a.ii and 218.8 TFEU. Look also to art. 67 TFEU about the position of fundamental

rights within EU’s structure: ‘The Union shall constitute an area of freedom, security and justice with

respect for fundamental rights and the different legal systems and traditions of the Member States.’ 106

‘On 17 March 2010, the Commission proposed negotiation Directives for the EU's accession to the

Convention. On 4 June 2010, EU Justice Ministers gave the Commission the mandate to conduct the

negotiations on their behalf. On 26 May 2010, the Committee of Ministers of the Council of Europe

gave an ad-hoc mandate to its Steering Committee for Human Rights to elaborate with the EU the

necessary legal instrument for the EU’s accession to the ECHR.’ Council of Europe, EU accession to

the European Convention on Human Rights, available at

http://www.coe.int/t/dc/files/themes/eu_and_coe/default_EN.asp. Look also to V. Reding, ‘The EU's

accession to the European Convention on Human Rights: Towards a stronger and more coherent

protection of human rights in Europe’, Hearing of the European Parliament's Constitutional Affairs

Committee, Brussels, 18 March 2010, available at http://ec.europa.eu/commission_2010-

2014/reding/pdf/speeches/speech_20100318_1_en.pdf 107

J. Pielow and E. Ehlers, ‘Ownership unbundling and constitutional conflict: a typical German

debate?’, 19. 108

Mostly guided by ECHR and national constitutions. ibid, 21. 109 ECtHR, James v United Kingdom [1986] 8 EHRR 123.

22

as a concept is totally compatible with either a legal or a natural personality.110

We

should note that not only ownership unbundling constitutes a deprivation that may

violate protection of property but ISO model –requiring transfer of management of

specific assets to an independent third party- seems to fall within the spectrum of this

right as well.111

Although under ISO model, the assets are not legally transferred, the

relation of the owner to the asset is severely weakened, as the owner looses the power

of administration of the asset112

and the exercise of substantial ownership rights is

quite limited.113

Apart from the right of ownership, ownership unbundling may also violate the

occupational freedom114

/ freedom to pursue an economic activity115

and the right to

property of the shareholders, as far as their rights on the undertaking are concerned,

while ISO model can also violate the freedom of association, regarding the

shareholders.116

Conditions for Justified Limitations or Deprivations of Property

However, according to our opinion ownership unbundling as a measure of the Third

Energy Package does not actually violate the freedoms noted above and especially the

right to property. First, art. 1, 1st

Protocol ECHR explicitly recognises that a person

110 J. Pielow, G. Brunekreeft and E. Ehlers, ‘Legal and economic aspects of ownership unbundling in

the EU’,110. The authors express a doubt about whether this right can also be recognised for totally

public undertakings. 111

J. Pielow, G. Brunekreeft and E. Ehlers, ‘Legal and economic aspects of ownership unbundling in

the EU’,111; J. Pielow and E. Ehlers, ‘Ownership unbundling and constitutional conflict: a typical

German debate?’, 12, text to note 57. And within the spectrum of the freedom of capital movement as

well, F. Säcker, ‘The “deep” independent system operator - A German perspective on implementing an

effective and efficient unbundling of TSOs.’, (2008) 2 European Review of Energy Markets, 10,

available at http://www.eeinstitute.org/european-review-of-energy-market/erem6-article-saecker. 112

ECJ, Case C-44/79 Hauer, ECR 1979, I-3727, no 19: ‘Having declared that persons are entitled to

the peaceful enjoyment of their property , that provision envisages two ways in which the rights of a

property owner may be impaired , according as the impairment is intended to deprive the owner of his

right or to restrict the exercise thereof .’ 113

F. Säcker, ‘The “deep” independent system operator - A German perspective on implementing

an effective and efficient unbundling of TSOs.’, 10. 114

ibid, 10-11. 115 K. Talus and A. Johnston, ‘Comment on Pielow, Brunekreeft and Ehlers on ‘ownership

unbundling”, 5, who also mention that this freedom is related to the right to property, also citing Nold

case. ECJ, Case C-4/73, Nold [1974] ECR 491. 116

F. Säcker, ‘The “deep” independent system operator - A German perspective on implementing

an effective and efficient unbundling of TSOs.’, 10-11.

23

can be legitimately deprived of its property due to reasons of public interest.117

Art.

17.1 Charter of Fundamental Rights of the European Union also repeats this

provision, while ECtHR accepts that fundamental rights have to be balanced with the

general social interests.118

This means that according to EU Law the right to property

is not established as inviolable and forced transfer of assets can be legitimate under

specific reasons. ECJ recognises that all rights related to property have to be

interpreted according to the social function and role of property. 119

It also recognises

that specific limitations to property could be acceptable if they are based on reasons of

public interest and if they are justified by the general EU objectives.120

The above

conclusion is also affirmed by the constitutional traditions of Member-States.121

Ownership unbundling is related to the opening of energy market to free competition

and to the establishment of an internal energy market; both these objectives fall within

the spectrum of EU’s key objectives and certainly are issues of high public and

community interest.122

Fundamental rights, such as the right to property cannot impair

the establishment and the function of a competitive energy market.123

Therefore, it is

possible that certain limitations to the right to property can be imposed, in order that

these objectives are fulfilled.

117 Look also to A. Grgiæ, Z. Mataga, M. Longar and A. Vilfan, The right to property under the

European Convention on Human Rights: A guide to the implementation of the European Convention

on Human Rights and its protocols, (Strasbourg: Council of Europe, 2007), 13. 118

ECtHR, Soering v. United Kingdom, Judgment of 7 July 1989, at 89. 119 ECJ, Case C-4/73, Nold at 14: ‘the rights thereby guaranteed, far from constituting unfettered

prerogatives, must be viewed in the light of the social function of the property and activities protected

thereunder .’; S. Praduroux and K. Talus, ‘The third legislative package and ownership unbundling in

the light of the European fundamental rights discourse’ (2008) 9 CNRI 3.

120 ibid at 14: ‘For this reason, rights of this nature are protected by law subject always to limitations

laid down in accordance with the public interest.

Within the community legal order it likewise seems legitimate that these rights should, if necessary, be

subject to certain limits justified by the overall objectives pursued by the community, on condition that

the substance of these rights is left untouched .’ ; M. Hunt, ‘Ownership Unbundling: the Main Legal

Issues in a Controversial Debate’, 73.

121 ECJ, Case C-44/79 Hauer, at 20: “Therefore, in order to be able to answer that question , it is

necessary to consider also the indications provided by the constitutional rules and practices of the nine

member states . One of the first points to emerge in this regard is that those rules and practices permit

the legislature to control the use of private property in accordance with the general interest . thus some

constitutions refer to the obligations arising out of the ownership of property ( german grundgesetz ,

article 14 ( 2 ), first sentence ), to its social function ( italian constitution , article 42 ( 2 )), to the

subordination of its use to the requirements of the common good ( german grundgesetz , article 14 ( 2 ),

second sentence , and the irish constitution , article 43.2.2* ), or of social justice ( irish constitution ,

article 43.2.1* ). In all the member states , numerous legislative measures have given concrete

expression to that social function of the right to property . Thus in all the member states there is

legislation on agriculture and forestry , the water supply , the protection of the environment and town

and country planning , which imposes restrictions , sometimes appreciable , on the use of real property

.” This argument also affirms the social function of property. 122

Look for example to the preamble and art. 3, 4.2, 170.1 and 194 and Title VII, Ch.1 TFEU. 123 ECJ, Case C-44/89 Von Deetzen / Hauptzollamt Oldenburg [1991] at 28.

24

In order that such limitations are acceptable, the limitations should not be so extensive

that they harm the substance of the right to property, meaning that a limitation cannot

result to an absolute negation of the person’s property rights.124

Regarding ISO model

this is clearly not the case, as this model does not negate the economic utility of the

asset under operation and the owner keeps earning profits from that. On the other

hand, ownership unbundling is indeed a measure that results to the full divestiture of

the asset. However, this does not mean that the substance of the property right,

meaning its economic value, has to be harmed, as compensation.125

Compensation,

although not provided by the Third Energy Package can derive from the transfer of

the assets under ownership unbundling to a third party; actually, Third Energy

Package does not ask for a confiscation or for a forced donation of the undertakings’

assets but it just prohibits simultaneous ownerships of two different types of assets.

This means that a company that actually owns these two different types of assets, can

sell at a fair price -formed by the market-126

to another company one type of these

assets. However, somebody could argue that a forced sale of assets also constitutes a

violation of the right to disposal –one aspect of the right to property- and that it is

difficult to achieve a fair price, as ownership unbundling will create an increased offer

of similar assets in the European market at the same time. Although one opinion

argues that a compensation less than the real market value can be acceptable, in case

that the relevant measure is related to some important objectives of public interest,

such as an economic reform127

and while we may accept that under special

circumstances the compensation requirement can be omitted,128

we believe that the

provisions of the Third Energy Package about ownership unbundling are imperfect

regarding the lack of a compensation scheme for the undertakings.

Furthermore, another key requirement in order that such a divestiture could be

accepted as legitimate has to do with the principle of proportionality, which we will

124

ECJ, Case C-4/73, Nold at 14:‘…it likewise seems legitimate that these rights should, if necessary,

be subject to certain limits justified by the overall objectives pursued by the community, on condition

that the substance of these rights is left untouched .’; Look also to J. Pielow, G. Brunekreeft and E.

Ehlers, ‘Legal and economic aspects of ownership unbundling in the EU’,107-108. 125

Art. 17.1 Charter of Fundamental Rights of the European Union calls for ‘fair compensation’. 126 J. Pielow and E. Ehlers, ‘Ownership unbundling and constitutional conflict: a typical German

debate?’, 26, who talk about ‘full value measured at the market price’. 127

K. Talus and A. Johnston, ‘Comment on Pielow, Brunekreeft and Ehlers on ‘ownership

unbundling”, 6, who also cite the ECtHR Case, James v United Kingdom. 128 ECtHR, Pressos Compania Naviera SA v. Belgium, Judgement of 20-11-1995.

25

examine in a separate chapter.129

Concerning all the other aspects of the issue of the

right to property, it seems that ownership unbundling does not violate in principle the

fundamental property rights, although one problem can be identified regarding the

compensation of the undertakings under unbundling for the divestiture of their assets.

Other Freedoms & Rights

Regarding the other rights mentioned above,-freedom to pursue an economic activity

and freedom of association- as well as the property rights of the shareholders of

undertakings that will fall within the field of application of ownership unbundling and

ISO model, our opinion is the same as this concerning property rights.

First, freedom of economic activity is not an absolute right –like property- and it can

be limited for reasons of public interest.130

Second, the substance of this right is not

harmed131

as the undertakings are not restricted from any business activity but just

from either transmission or generation, so they can keep their key or most profitable

activity and transfer the other one.132

Regarding freedom association, we refer to the

analysis above about freedom of capital movement.133

Regarding the shareholders’

property rights, the same analysis, as this about the property rights of undertakings,

applies. Proportionality requirement has to be fulfilled as well regarding the limitation

of all these rights.

129

ibid, 6. According to both ECJ’s and ECtHR’s case law. 130

ECJ, Case C-4/73, Nold [1974]. 131

Joined Cases C-184 and 223/02, Kingdom of Spain and Republic of Finland v European Parliament

and Council of the European Union [2004]. 132

K. Talus and A. Johnston, ‘Comment on Pielow, Brunekreeft and Ehlers on ‘ownership

unbundling”, 5-6. 133

Commission, Press Release (IP/04/17) of 07/01/2004, ‘Free movement of capital: Commission calls

on United Kingdom to apply Court of Justice ruling’, available at

http://europa.eu/rapid/pressReleasesAction.do?reference=IP/04/17&format=HTML&aged=0&languag

e=EN&guiLanguage=en; ECJ, Case C-98/01 Commission v UK at 44; F. Säcker, ‘The “deep”

independent system operator - A German perspective on implementing an effective and efficient

unbundling of TSOs.’, 10.

26

PROPORTIONALITY PRINCIPLE

Content of the Principle

According to this principle each decision and measure has to be based on a fair

balancing of interests involved and on a reasonable choice of necessary means.134

ECJ

has widely accepted that this principle has an important role within EU Law135

and

literature argues that it has a constitutional status within the EU Legal Structure136

as

well as regarding case law of ECtHR.137

ECJ also accepts that measures restricting the

freedom of capital movement have to abide by the principle of proportionality.138

ECJ has developed a threefold test for examining whether a measure is

proportionate.139

The first part of this test is the test of effectiveness or suitability

(whether the measure is an effective means to achieve the goals for which it is

adopted), the second is the test of necessity and subsidiarity (whether the measure is

the less restrictive means to achieve the goals –meaning that there are no less

restrictive alternatives) and the third is the stricto sensu proportionality test (whether

the measure is excessive in relation to the goals pursued and whether the interests

harmed from the measure are less important than the goals).140

Although this threefold

test is not strictly applied by ECJ in all cases,141

it seems that it is preferred in cases

134

Look to art. 5.3 Treaty Establishing the European Community: ‘Any action by the Community shall

not go beyond what is necessary to achieve the objectives of this Treaty.’; T. Tridimas, The General

Principles of EC Law (Oxford: OUP 1999), 137; ECJ, 331/88 Fedesa [1990], par. 13: ‘The Court has

consistently held that the principle of proportionality is one of the general principles of Community

law. By virtue of that principle, the lawfulness of the prohibition of an economic activity is subject to

the condition that the prohibitory measures are appropriate and necessary in order to achieve the

objectives legitimately pursued by the legislation in question; when there is a choice between several

appropriate measures recourse must be had to the least onerous, and the disadvantages caused must

not be disproportionate to the aims pursued.’ 135

J. Schwarze, European Administrative Law, (London: Sweet & Maxwell, 2006), 677; ECJ, 11/70

Internationale Handelegesellschaft [1970]. 136

J. Jans, R. De Lange, S. Prechal and R. Widdershoven, Europeanisation of Public Law (Groningen:

Europa Law Publishers, 2007), 146. 137

P. Van Dijk and G. Van Hoof, Theory and Practice of the European Convention on Human Rights

(Hague: Kluwer, 1998), 81. 138

ECJ, 174/04 Commission v Italian Republic [2005], par. 35 and ECJ, 319/02 Manninen [2004], par.

29. 139

M. Hunt, ‘Ownership Unbundling: the Main Legal Issues in a Controversial Debate’, 87. 140 ibid, 87. 141

T. Tridimas, The General Principles of EC Law, 139; G. de Burca, The principle of proportionality

and its application in EC law, YEL 1993, 105, 111; F. Jacobs, ‘Recent Developments in the Principle

of Proportionality in European Community Law’, in E. Ellis (eds.), The Principle of Proportionality in

the Laws of Europe, (Oxford: Hart Publishing, 1999), 1.

27

concerning property rights.142

According to the relevant literature, ECJ seems to

frequently adopt a strict position regarding the fulfilment of proportionality, in cases

regarding restricitons of key EU interests, such as the freedom of capital movement or

goods circulation,143

while in other cases it seems to adopt a much more lax position

as it just examines whether the measure is ‘manifestly inappropriate’144

or whether the

measure is clearly disproportionate in relation to the interests harmed or the objectives

pursued.145

Such an approach is more common in cases involving the assessment of a

complex economic situation, as ECJ has accepted that in such cases the EU

Authorities may have a broad discretionary power.146

We should note that ECtHR in

relevant cases follows a similar attitude by recognising a wide margin of appreciation/

discretion (appreciation doctrine) to the national authorities regarding their view about

the necessity and the choice of the measure in question except if the latter is

manifestly unreasonable.147

Regarding the effectiveness test, ECJ examines whether the measure is appropriate

regarding the objectives pursued by the authority that imposed this measure.148

In

general, ECJ seems to accept that the measure is proportionate if it contributes to the

achievement of the goals and does not proceed to a detailed examination of its

effectiveness. This means that ECJ does not assess–and cannot assess, given its lack

of expertise- the full effectiveness of the measure and does not examine if it was the

best possible but simply examines whether it is useful regarding the aims pursued or

142

Look for example to ECJ, 280/93, Germany v Council [1994], par. 78 : ‘…the exercise of the right

to property and the freedom to pursue a trade or profession may be restricted, particularly in the context

of a common organization of a market, provided that those restrictions in fact correspond to objectives

of general interest pursued by the Community and do not constitute a disproportionate and intolerable

interference, impairing the very substance of the rights guaranteed (Case 265/87 Schraeder v

Hauptzollamt Gronau [1989] ECR 2237, paragraph 15, Case 5/88 Wachauf [1989] ECR 2609,

paragraph 18, and Kuehn, cited above, paragraph 16).’ 143

T. Tridimas, The General Principles of EC Law, 138. 144

ECJ, 350/96 Clean Car Autoservice [1998], par. 35. 145

Look for example about this position to ECJ, Joined cases 453/03, 11/04, 12/04 and 194/04, ABNA

[2005], par. 69. 146

ECJ, 138/79, Roquette [1980]; 179/95, Kingdom of Spain v EU Council [1999]. A similar approach

has also been adopted for issues concerning the common commercial or agricultural policy. Look to K.

Talus and A. Johnston, ‘Comment on Pielow, Brunekreeft and Ehlers on ‘ownership unbundling”,

(2009) 20 Journal of World Energy Law & Business, 1, 5. 147

ECtHR, National & Provincial Building Society, the Leeds Permanent Building Society and the

Yorkshire Building Society v. The United Kingdom, Judgement of 23-10-1997, 25 EHRR 127, AT 80-

81; ECtHR, Scollo v Italy, Judgement of 28-09-1995, A 315 C, at 29; ECtHR, Spadea and Scalabrino

v. Italy, , Judgement of 28-09-1995, A 315 B, at 28; ECtHR, James and others v. The United Kingdom,

Judgement of 21-02-1986, A 098 B, at 46; ECtHR, Mellacher and others v. Austria, Judgement of 14-

10-1988, A 169, at 45. 148

ECJ, 350/96 Clean Car Autoservice [1998] par. 35, 309/02, Radlberger Getränkegesellschaft mbH

& Co. [2004], par. 78.

28

whether it is evidently unsuitable.149

Moreover, ECJ is reluctant to investigate the

possible future results of the measures in question and mainly sticks to the facts and

just examines whether it is so apparently unsuitable that this unsuitability can be

understood in advance without any complex assessment process.150

Regarding the test of necessity and subsidiarity, the literature151

argues that it

constitutes the most important part of the ECJ’s proportionality test. Necessity means

whether the measure is actually necessary for the achievement of the goals152

and

subsidiarity153

means whether there are less harmful –but equivalent in effectiveness

terms- means for this achievement.

Regarding stricto sensu proportionality test, it generally concerns the balancing of the

interests involved, harmed or promoted by the measure in question.154

The seriousness

of the harm caused to some interests by the measure or the seriousness of the danger

for the interests protected by the measure as well as the nature of these interests and

aims, also play an important role.155

156

Ownership Unbundling and Proportionality

Concerning the relation of the measure of ownership unbundling to proportionality

requirement, we should firstly mention that ECJ seems reluctant to proceed to a

detailed analysis of the complex matter of the measure’s suitability, as it constitutes a

149

ECJ, 434/04, Ahokainen and Leppik [2006], par. 39. 150

ECJ, 43/72, Merkur [1973], par. 24 and joined Cases 133/93, 300/93 and 362/93, Crispoltoni

[1994], par. 43. 151 T. Tridimas, The General Principles of EC Law, 143. 152

ECJ, Case C-491/01, British American Tabacco [2002] ECR, p. I-11453, at 122. 153

Regarding this specific examination, subsidiarity has a relevant but more specific meaning than this

concerning former art. 5 TEC, examined above. 154 T. Tridimas, ‘Proportionality in Community law: Searching for the Appropriate Standard of

Scrutiny’, in E. Ellis (eds.), The Principle of Proportionality in the Laws of Europe, (Oxford:Hart

Publishing, 1999), 65, 68. 155

The ‘rule of reason’ as developed in Cassis de Dijon case (ECJ, 120/78 Rewe Zentral [1979] about

the freedom of movement of goods), according to which a proportionality test has to be applied, in

order to examine whether the regulation’s effects are justified by the nature of the regulation’s goals,

actually incorporates the element of a stricto sensu proportionality test. Look also to F. Ortino, Basic

Legal Instruments for the Liberalisation of Trade: A Comparative Analysis of EC and WTO Law

(Oxford: Hart Publishing, 2004), 470. 156

However we should note that ECJ does not seem to frequently focus on a stricto sensu

proportionality test, probably because of the political character of a decision balancing independent

interests. Jans 2000, p. 241; G. de Burca, The principle of proportionality and its application in EC law,

107; J. Jans, ‘Proportionality Revisited’, (2000) 27 Legal Issues of European Integration, 239, 241.

29

key part of EU’s Energy Policy.157

Therefore, this issue has a highly political

character and ECJ -if it is called to assess ownership unbundling from the perspective

of proportionality- is likely to just evaluate whether it is “manifestly inappropriate” or

not rather than involving in an economic and technical investigation of an EU’s

political decision. Moreover, as recent Commission’s decisions on structural remedies

–on the grounds of antitrust law- leading to unbundling seem to constitute an

integrated part of such policy and relate to issues concerning political assesment of

energy policy priorities and long-term European economic planning on internal

energy market, ECJ –if called to examine these remedies- is not likely to be involved

in a complex economic review of these measures.

Concerning suitability, effectiveness and necessity of ownership unbundling in

economic terms, as a means to improve competition in wholesale and retail markets

and the general opening of European energy market, we have to admit that there exist

a lot of arguments158

and counter-arguments.159

We will not proceed to an analysis of

these economic arguments,160

however we observe that actually ownership

157

K. Talus and A. Johnston, “Comment on Pielow, Brunekreeft and Ehlers on ‘ownership

unbundling’” (2009) 20 Journal of World Energy Law & Business, 1, 5; M. Hunt, ‘Ownership

Unbundling: the Main Legal Issues in a Controversial Debate’, 89. 158

Look for example to F. Lévêque, Do not dissipate too much energy with ownership unbundling

20th September 2007, available at http://www.energypolicyblog.com/2007/09/20/do-not-dissipate-too-

much-energy-with-ownership-unbundling/; P. Joskow, Transmission Policy in the United States,

(2005) 13 Utilities Policy, 95; T. Léautier, Transmission Constraints and Imperfect Markets for Power,

(2001) 19 Journal of Regulatory Economics, 27.; Moffatt Associates, Five Key Arguments for

Ownership Unbundling, available at http://www.moffatt-

associates.com/energy_services/measuring_economic_impact/documents/appendix_c.pdf; Sheffield

Energy & Resources Information Services (SERIS), The Advantages Of Full Ownership Unbundling

In Gas Transportation And Supply: How The European Commission Got It Wrong About the UK, June

2006 available at http://www.seris.co.uk/SERIS_reply_to_OFGEM.pdf; Ernst & Young, Department of

Trade and Industry, ‘The Case for Liberalisation’, 9, 14, 36, 39, 78, 79, 90, available at

http://webarchive.nationalarchives.gov.uk/+/http://www.berr.gov.uk/files/file28401.pdf; P. Lowe, I.

Pucinskaite, W. Webster and P. Lindberg, ‘Effective unbundling of energy transmission networks:

lessons from the Energy Sector Inquiry’, 29-32. ERGEG, ‘Third Legislative Package Input Paper 1:

Unbundling’, 5 June 2007, 9.; C. Held, ‘Ownership Unbundling and Independent System Operator –

New Regulatory Approaches to the European Electricity and Gas Markets’ 2nd Conference on Energy

Economics and Technology (TU Dresden, 13 April 2007). 159

Look for example to F. Bolle and Y. Breitmoser, ‘On the Allocative Efficiency of Ownership

Unbundling’, (2006) European University Viadrina Frankfurt (Oder) Department of Business

Administration and Economics Discussion Paper No. 255, available at

http://ideas.repec.org/p/zbw/euvwdp/255.html; R. Michaels, ‘Vertical Integration and the Restructuring

of the U.S. Electricity Industry’, (2006) 572 Policy Analysis, 1; C. Growitsch

and M. Stronzik,

Ownership Unbundling of Gas Transmission Networks – Theoretical Background and Empirical

Evidence (Paper submitted to the first annual conference of the journal Competition and Regulation in

Network Industries) (18.11.2008), available at http://crni.epfl.ch/papers/growitsch.pdf; S. Bühler, A.

Schmutzler and M. Benz (2004), Infrastructure quality in deregulated industries: is there an

underinvestment problem?, (2004) 22 International Journal of Industrial Organization, 253. 160

D. Mulder and V. Shestalova, Costs and benefits of vertical separation of the energy distribution

industry: the Dutch case (2005) available at

30

unbundling seems to receive the support of various groups of interests and political

and market players in EU,161

but also to face strong reaction.162

Although some

aspects of these reactions have a strong political character, there is a strong debate

about the conditions under which ownership unbundling can be economically efficient

and whether it is necessary indeed163

for the opening of the European Markets. On the

other hand, EU Authorities and especially Commission adopted a strong position in

favour of ownership unbundling’s suitability and necessity, seeming to have been

seriously influenced by the poor results of the previous EU’s efforts.164

Therefore, the issue of ownership unbundling’s efficiency –efficiency is a prerequisite

for necessity (if a measure is not efficient it can neither be necessary)- is still debated,

however there are strong scientific indications that it may have positive results

regarding the opening of markets –although, it is not clear whether it is the most

efficient measure available-. Nevertheless, all this debate is a matter of specialised

economic analysis, which is not possible to be assessed by a Court, but its purpose is

mostly to provide authorities with scientific material, in order to design their policy

and is also based on an examination of unbundling in comparison to other forms of

market organisation and of the set of conditions under which it can actually work-,

which cannot negate the relative efficiency of the measure in general. On these

grounds, it is clear that ownership unbundling can be viewed as an ‘effective measure’

–or at least not apparently unsuitable- under the spectrum of a judicial examination.

http://www.wip.tuberlin.de/typo3/fileadmin/documents/infraday/2005/papers/mulder_shestalova_Costs

_and_benefits_of_Vertical_Separation.pdf; B. Baarsma, M. Nooij, W. Koster, C. Weijden, ‘Divide and

rule. The economic and legal implications of the proposed ownership unbundling of distribution and

supply companies in the Dutch electricity sector’, (2007) 35 Energy Policy, Vol.35, 1785; M. Pollitt,

The arguments for and against ownership unbundling of energy transmission networks, (2007)

Working Paper, ESRC Electricity Policy Research Group, University of Cambridge, available at

http://www.eprg.group.cam.ac.uk/wp-content/uploads/2008/11/eprg0714.pdf 161

Look to K. Talus and A. Johnston, ‘Comment on Pielow, Brunekreeft and Ehlers on ‘ownership

unbundling”, 3, who refer to a number of energy market actors that support ownership unbundling and

especially to note 11, where they mention a list of supporting Member States. 162

S. Taylor, ‘Will the energy gambit work?’ 27.9.2007, available at

http://www.europeanvoice.com/article/imported/will-the-energy-gambit-work-/58331.aspx 163

Look for example about the necessity of ownership unbundling to J. Pielow, G. Brunekreeft and E.

Ehlers, ‘Legal and economic aspects of ownership unbundling in the EU’, 103-104; J. Pielow and E.

Ehlers, ‘Ownership unbundling and constitutional conflict: a typical German debate?’, 10. Look also to

M. Hunt, ‘Ownership Unbundling: the Main Legal Issues in a Controversial Debate’, 88-89, who

expresses serious doubts about the efficiency of ownership unbundling concerning enhancement of

competition and security of supply. 164

Commission ,‘DG Competition Report on Energy Sector inquiry’ (10 January 2007) COMP SEC

(2006) 1724, 6, 8, 10, 12, 13; Commission, MEMO/07/61 ‘Competition: Commissioner Kroes presents

results of energy sector inquiry to Energy Council’, 15.2.2007, available at

http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/07/61

31

However, according to our opinion this is not the case regarding necessity

requirement. Apart from the different views about whether there are other means

equally or more effective but less intrusive than unbundling165

, the Third Energy

Package itself has created alternatives to full ownership unbundling model. ISO

model provides for just a transfer of management and not of ownership,166

while the

ITO model provides that the legally separate operator can be vertically integrated.167

168 These models

169 -and especially the second one- are apparently less drastic and

intrusive than full ownership unbundling, but they are officialy included in the Third

Energy Package as totally legitimate alternatives. So, one could wonder: ‘Why full

ownership unbundling is necessary, if EU itself admits that some less drastic means

can be so effective that they are proposed as alternatives?’ and ‘How can ownership

unbundling be conceptually assumed as necessary, if we accept that there can be

alternatives?’.

According to our opinion, it is clear that the inclusion of alternatives into the Third

Energy Package weakens the arguments about the necessity of ownership unbundling.

On these grounds, ownership unbundling appears as a model solution and as the most

desirable measure –because it seems to have the most drastic results-, however the

rest solutions appear as adequate enough to provide the positive results pursued by

EU, at least for an interim period until a renewed regulation of energy markets –a

Fourth Energy Package-. In terms of necessity, this argument can actually undermine

the position of ownership unbundling. Although this may not be important regarding

the application of the Third Energy Package, as Member States may legitimately stick

to the model solution and not opt for a less drastic alternative, it may have a great

importance regarding the structural remedies imposed by the Commission in

competition law cases of the energy market.170

An affected by such measures

165

Look for example to M. Hunt, ‘Ownership Unbundling: the Main Legal Issues in a Controversial

Debate’, 88 and to A. Kotlowski, ‘Third-party Access Rights in the Energy Sector: A Competition Law

Perspective’, 9 who argue that there may exist some less strict but effective alternatives and to K. Talus

and A. Johnston, ‘Comment on Pielow, Brunekreeft and Ehlers on ‘ownership unbundling”, 7 who

argue that recent competition law cases seem to affirm that vertical integration creates severe problems

to energy markets and that drastic measures are necessary. 166

Electricity Directive 2009/72/EC art. 13, 14; Gas Directive 2009/73/EC art. 14, 15.

167 Electricity Directive 2009/72/EC art. 17–23; Gas Directive

2009/73/EC art. 17–23.

168 We do not mention ITO+ model, as it concerns an a la carte regulation and it is not clear to which

parameters it refers. 169

ISO model is criticised as of similar severity to ownership unbundling. M. Hunt, ‘Ownership

Unbundling: the Main Legal Issues in a Controversial Debate’, 88 text to note 158. 170

Art. 7 Regulation No 1/2003 ‘‘the Commission, when finding that there is an infringement of art 81

or of art 82 EC, may impose on the relevant undertakings any behavioural or structural remedies which

32

company can argue that such strict structural remedy was not necessary, as the

pursued objective could have been achieved by other measures, similar to thoses

included in the Third Energy Package. It can also argue that it is unproportionate and

inequal, after taking into consideration that the other companies that will fall in the

spectrum of the provisions of the third energy package about transmission may skip

ownership unbundling. Therefore, Commission will have to prove –if these remedies

are under judicial examination- that these specific cases have some specific elements

that require an even harsher solution than the general provisions of the Third Energy

Package –which was designed, in order to improve competition in energy markets-;

this seems quite difficult.171

Concerning stricto sensu proportionality, although there is also criticism about the

severity of the effects of ownership unbundling on many different rights of high EU’s

interests, in comparison to the goals pursued172

, we accept the opinion that neither this

measure is too heavy –after taking into consideration that unbundling affects only the

transmission activites of the undertaking and does not interfere with the other aspects

of its business, such as production, that it does not generally bind the undertaking too

severely, as the latter has many relevant business fields still available and its primary

activity is not affected173

and that the undertaking has the possibility to sell its assets

under unbundling, meaning that it is able to earn profit from such divestiture, a profit

that will weaken the negative impact of unbundling- nor the objectives pursued –

establishment of internal energy market, opening to competition and energy security-

are of reduced importance174

in relation to the interests harmed.

are proportionate to the infringement committed and necessary to bring the infringement effectively to

an end’’. 171

According to an opinion, it is questionable whether art. 7 Regulation No 1/2003 provides

authorization to Commission to impose such heave structural remedies. to J. Pielow, G. Brunekreeft

and E. Ehlers, ‘Legal and economic aspects of ownership unbundling in the EU’, 109. On the other

hand, in such case Commission could argue that such structural remedy can be more effective but less

strict as well than a very heavy fine. 172 M. Hunt, ‘Ownership Unbundling: the Main Legal Issues in a Controversial Debate’, 89; J. Pielow

and E. Ehlers, ‘Ownership unbundling and constitutional conflict: a typical German debate?’, 23-24. 173

Look to K. Talus and A. Johnston, ‘Comment on J. Pielow, Brunekreeft and Ehlers on ‘ownership

unbundling”, 6-7 who also refer to a number of relevant ECtHR decisions, according to which

proportionality condition was fulfilled. 174

The objective of the internal energy market is established by TFEU (art. 194) and the objective of

the open to competition internal market is established by art. 3, 32, 40, 101, 102, 106, 107, 119, 120

TFEU (look also to TFEU’s preamble ‘RECOGNISING that the removal of existing obstacles calls for

concerted action in order to guarantee steady expansion, balanced trade and fair competition,’)

33

Conclusions

Finally, we conclude that despite of the current debate about the value of ownership

unbundling as a model that will enhance competition, a legal examination of the issue

would probably result to the fact that this measure –in general- does not violate the

proportionality principle, after considering the importance of the goals pursued and

the internal market’s problems that led EU to adopt a stricter approach towards the

organisation of transmission. This argument is also supported by the practice of ECJ

to accept a wide discretion to EU legislator,175

the technical nature of the assesment of

the effectiveness of unbundling and the high importance of ownership unbundling for

the Commission.176

On the other hand, we focus on necessity aspect especially

regarding structural remedies imposed in competition cases, as a result of the

existence of alternatives to unbundling in the Third Energy Package, which will be

generally applied in all relevant undertakings. Although such remedies are in

accordance with the general eenrgy policy of the Commission, the problem is so

apparent that puts the legitimacy of such measures under serious question.

FINAL CONCLUSIONS

After the previous analysis, we can draw the conclusion that in general ownership

unbundling does not seem to violate the key EU rules and fundamental rights

proposed by th literature as possible obstacles to that measure. Specifically, the

measure –as well as the ISO model- falls within the competenece of EU, does not

violate the principles of non-discrimination, subsidiarity and proportionality and does

not constitute an unjustified restriciton of either the freedoms of capital movement

and establishment or the fundamental rules about rights to property, freedom to

pursue an economic activity and freedom of association. The Third Energy Package

includes a series of provisions that balance the radical character of the measure with

the rules mentioned above177

and emphasise national initiatives. On the other hand,

we can still recognise some problematic points regarding this framework. The first

175

M. Hunt, ‘Ownership Unbundling: the Main Legal Issues in a Controversial Debate’, 89. 176 J. Pielow and E. Ehlers, ‘Ownership unbundling and constitutional conflict: a typical German

debate?’, 21.

177

F. Säcker, ‘The “deep” independent system operator - A German perspective on implementing an

effective and efficient unbundling of TSOs.’, 11.

34

one has to do with possible inequalities that may arise during the implementation of

the framework between undertakings from Member States with a different

organisation of the market structure. This problem, although it does not directly

concern the framework but future problems that may occur, should be addressed by a

better development of the level playing field clause. Nevertheless, it is rational that

during the transitional phase establisheb by the Third Energy Package –as we believe

that as the consolidation of the market and the opneing to competition will proceed, it

will be substituted by a new framewrok- and its multiple structural models, such

problems should be expected –besides, at this time, there are much more important

problems regarding the internal energy market-. The second point of criticism refers

to the compensation for the potential losses of the undertakings due to ownership

unbundling. We believe that this problem can be addressed by a supplementary

compensation scheme for undertakings that face problems concerning the transfer of

their assets to third parties and by granting specific exemptions or time extensions for

the fulfilment of unbundling requirements to cases where there is an apparent relevant

problem.178

Therefore, owenrship unbundling as a general measure of sector regulation -although

radical and strict- seems to be a promising solution for the establishment of an open to

competition internal energy market, which does not fall outside the rules of legitimacy

of EU legal structure and its radical character seems necessary in relation to the

important difficulties that EU faces concerning energy markets.Moreover, it is

affirmed that the principles and the fundamental rights included in the EU legal

structure have the adequate flexibility179

–regarding their conditions, content and

interpretation-, so that they do not constitute a serious problem for the development of

a framework of structural measures and of a radical policy in the energy market.

However, we do recognise a problem regarding ownership unbundling as a structural

remedy used by Commission, on the grounds of competition law enforcement. This

problem primarily refers to the proportionality principle and concerns the aspect of

necessity of the measure. First, the necessity of the measure has to be justified case-

by-case -Commission has to prove in any case that all less strict measures are less

178 We could imagine a case-by-case temporary derogation relevant to this –concerning third party

access- granted by art. 48 Dir. 2009/73/EC about underatkings’ financial difficulties due to take-or-pay

contracts. 179

K. Talus and A. Johnston, ‘Comment on Pielow, Brunekreeft and Ehlers on ‘ownership

unbundling”, 2-3.

35

adequate-; this is a difficult task to achieve, if we take into consideration the

particularities of each case and the recent generalised tendency of the Commission to

apply such measures to energy cases. Second, this justification is even more difficult,

given that the sector rules about unbundling that are going to be applied shortly

provide for less strict alternatives and for a comprehensive sector regulation structure.

This justification will become more questionable in future cases, which will be

addressed during the simultaneous application of the less strict and more flexible

provisions of the sector regulation. This is an additional problem for the dualistic

model of rules and authorities –competition law and sector regulation-180

that concern

the internal energy market.181

We can just conclude that such structural interventions

based on competition rules will abide by the principle of proportionality, only in cases

where the less strict market organisation model –perhaps ISO or ITO- along with poor

regulatory supervision will allow the continuation of high vertical integration and

anticompetitive practices, so that an even harsher measure could be assumed as the

only adequate measure and the intervention of the Commission could be justified as

proportionate.

180

Look to the paper Diathesopoulos, Michael D., Competition Law and Sector Specific Rules in

European Energy Sector: A Comparison to Trinko, Recent Commission’s Antitrust Decisions and a

Look to the Future (July 14, 2010). Available at SSRN: http://ssrn.com/abstract=1639926 and

Diathesopoulos, Michael D., From Energy Sector Inquiry to Recent Antitrust Decisions in European

Energy Markets: Competition Law as a Means to Implement Sector Regulation (July 14, 2010).

Available at SSRN: http://ssrn.com/abstract=1639883. 181 Look also to D. Geradin, ‘The Concurrent Application of Competition Law and Regulation: the

Case of Margin Squeeze Abuses in the Telecommunications Sector’, 52, 61; D. Geradin, ‘Limiting the

Scope of Article 82 of the EC Treaty: What can the EU Learn from the US Supreme Court's Judgment

in Trinko in the wake of Microsoft, IMS, and Deutsche Telekom?’, 27.